CA - Pass-Through Entity Elective Tax (PTET)

California law allows entities taxed as a partnership or an S-corporation to annually elect to pay an elective tax based on its qualified net income. The election is be made on an original, timely filed return. The qualifying partnership or S corporation must not be a publicly traded partnership or permitted or required to be in a combined reporting group. If the S-corporation or Partnership makes this election, the shareholders/partners are eligible for a credit on their individual return.

The election is made when filing the California partnership or S-corporate tax return. The PTE must make an initial payment by June 15.  

This election can be made annually. The election cannot be revoked for the tax year once made for that tax year.

In Drake Tax,

1. Go to CA data entry > screen 3804 Pass-Through Entity Elective Tax Calculation and check the box PTE elects to pay elective tax.
2. On each CA > K1 screen, check the box Partner/Member/Shareholder consents to elective tax payment on qualified net income. 
   • If the partner/shareholder is a non-resident who is consenting to the elective tax payment, they will also need to check the box NR Default Col E to Col D on the K1 screen. This will enable the apportioned income to show on the non-resident's K1 and calculate the 3804 for that shareholder/partner. 

To enter PTE Elective Tax Payments already paid for this year (tax year 2022), go to the ES screen and on the left side of the screen, select ST: CA and Type: PP. 

To generate PTE Elective Tax payments for next year (tax year 2023), go to ES screen and on the right side of the screen, select ST: CA and Type: PP. Two vouchers are generated in view mode labelled CA3893ES. Voucher 1 is due by June 15, 2023. Voucher 2 is due by March 15, 2024. 

Calculation: 

The elective tax rate is 9.3% of the qualified net income of the pass-through entity. If there is no qualified income, no tax will be calculated. Per the Form 3804 Instructions: 

"Qualified net income – is defined as the sum of the pro-rata share or distributive share of income and guaranteed payments subject to personal income tax of the electing qualified PTE’s qualified taxpayers. For an S Corporation, the qualified net income for a qualified taxpayer can generally be computed by taking the sum of Schedule K-1 (100S) lines 1-10 minus lines 11 and 12. For a partnership the qualified net income for a qualified taxpayer can generally be computed by taking the sum of Schedule K-1 (565/568) lines 1, 2, 3, and 4c through 11 minus lines 12 and 13. A taxpayer with negative income could never be included in the qualified net income of the entity. The electing qualified PTE may still elect to pay the elective tax even if some partners, shareholders, or members do not consent to having their pro-rata or distributive share of income and guaranteed payments included in the electing PTE’s qualified net income."

Federal Deduction Adjustment/Override: 

Pass-Through Entity Tax estimate amounts (type PP) are not automatically carried from the ES screen to the 1065/1120-S return at this time. Additional entries may be needed on the federal DED screen, Taxes and Licenses (line 12 in an 1120-S or line 14 in a 1065). An adjustment field (+/-) is available on the DED screen, or you can click the blue Detail link and use the applicable override field (=) to enter the total amount of income or franchise taxes to be reported on the federal return. For more information, review the IRS Notice 2020-75. 

1040

In the individual return, go to CA data entry > Credits tab > 3804 screen. Make all necessary entries. In view mode, the credit shows on CA 540, page 2, line 43.